Whether you are a start-up or an established business, a forecast will help. Forecasting is not just about predicting your future. It acts as your business plan. It can be used to drive and track successful performance as a result.

So how is a forecast made?

Well, you take your ideas, plans and expectations and translate them into financial numbers. You try them on for size. For example, what new customers do you expect from existing operations and what will be their spend with you? What results do you expect from new marketing activities and at what cost? Which services do I want to give a boost to? What are the cash flow implications of investing upfront in investing in new people and services?

On a more basic level, which costs do we expect to increase and by how much? What pay rises and bonuses will we give our staff, when and how calculated? What does all this do to our cash flow? How does it all interact with the “main cashflow events” such as VAT, tax payments and planned capital expenditure?

Typically, a forecast will go through several iterations before you resolve on the final plan. Seeing the effects of one decision, you will be saying such things as, “OK, we definitely do want to do X, so it’s clear that we need to invest in £Y much earlier”. Contingency plans will come out: “If we haven’t achieved sales of X by this date, then we can hedge by doing this instead”.

Time and financial milestones will come out of the plan as a result of the iterations. Key Performance Indicators (KPI’s) are identified in addition, the things that matter the most to your success.

How to drive successful performance?

You can now drive successful performance against your plan and monitor progress against it by regularly comparing actual results against the forecast. A correct interpretation is important for keeping your business on track.

Three questions should be asked about each performance area:
1. How is our performance doing? Is it as expected
2. Why is this happening? What is causing it, are these temporary or permanent factors.
3. What should we do about it? Should we intervene or stay out, should a contingency plan be activated.

A living plan

Your plan is agile and alive. With each review and each decision, you will update your forecast for the actual results achieved and new plans forward. You will congratulate your team on their performance. Be open and realistic with them about where you are. Communicate clearly about your expectations going forward and their part in it. Successful performance will be driven by it.

What do your plans mean in financial terms and who in your team knows about it?